Question

4. Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2017). In 2017, his net Schedule C income was $340,000. This was his only source of income. This year, Reggie is considering setting up a retirement plan.

What is the maximum amount he may contribute to the self-employed plan in each of the following situations?

a. He sets up a SEP IRA.  

Maximum amount contributed

?

b. He sets up an individual 401(k).

Maximum amount contributed

?

Answer 1

(a).

Maximum amount contributed in SEP IRA = $51000

Explanation;

Reggie may contribute up to 25% of his compensation but can not be more than $51000 (Maximum limit). Thus first of all let’s calculate 25% of total compensation;

25% of $340000 = $85000

But maximum permissible amount is $51000

Thus, Maximum amount contributed = $51000 in SEP IRA.

(b).

Maximum amount contributed in an individual 401 (k) = $60000

Explanation;

Reggie can contribute in two ways in 401(k) plan:

·        $24000 + ($340000 * 20%) = $92000

·        But maximum limit is $60000

Thus, Reggie can contribute maximum of $60000 in an individual 401(k).